Finance

Where the Other Mega-Merger Stands

Sizing up AT&T-DirecTV Approval With Strings Likely Attached 6/29/2015 8:00 AM Eastern
TakeAway

The FCC appears poised to allow AT&T and DirecTV consummate their $48.5 billion marriage, with a few net neutrality-related conditions.

The other deal of the century — AT&T’s $48.5 billion purchase of DirecTV — is nearing the finish line, and most analysts believe the combination, which will create the largest multichannel video provider in the country with 26 million video customers, will likely have to make a few concessions to regulators to pass muster.

 

The Federal Communications Commission hasn’t officially restarted the 180-day shot clock on merger approval since halting it in March at the 170-day mark. But most analysts are confident that the merger will gain approval by June 30, or early July at the latest.

 

Telsey Advisory Group analyst Tom Eagan said he expects AT&T would have to make a few concessions to gain FCC approval — most likely around net neutrality and Open Internet rules — but he believes AT&T will gladly comply.

 

“I expect that the FCC will use the deal as a way to extract concessions,” Eagan said. “AT&T will likely comply in order to get the deal done by the end of June to improve its negotiations versus CBS.”

 

STOCKS TRENDING UP

 

Investors appear to feel the same way. Both AT&T and DirecTV stock have been trading steadily over the past month — AT&T stock is up 3.2% ($1.11 each) to $35.78 per share on June 24 from $34.67 on May 26.

 

DirecTV shares have risen 1.7% in the same timeframe, from $91.57 on May 26 to $93.16 on June 24. For the past 12 months, DirecTV shares are up about 10.4% from $84.40 to $93.16 each, while AT&T stock rose about 1.5% during the same period to $35.78 from $35.26 per share.

 

Those CBS negotiations could play a key role. AT&T’s retransmission-consent deal with the network expires on June 30 and, according to recent reports, the distributor had asked for an extension of the deal in March but it was denied. According to several reports, CBS now fears that, although negotiations are ongoing, AT&T would have less incentive to strike a deal with the programmer after the merger is complete because it could effectively shutter its U-verse TV service and move its 6 million customers to DirecTV’s satellite platform.

 

DirecTV, which has 20 million TV customers, has several years left on its CBS retransmission-consent agreement.

 

Several groups have already let the FCC know which conditions they think it should impose on the deal. The National Association of Broadcasters has asked the FCC to require DirecTV to carry all local broadcast signals in 210 markets nationwide as a condition of approval. The American Cable Association, which represents small cable, independent operators, has asked the FCC to ensure that the combined AT&T-DirecTV continues to provide access to its four regional sports networks — Root Sports Northwest, Pittsburgh, Rocky Mountain and Southwest — and to apply conditions that make sure prices for those networks do not rise to unreasonable levels.

 

AT&T and DirecTV officials met with the FCC in early June and discussed voluntary conditions. They agreed not to ask for federal subsidies to bring higher-speed Internet service to an additional 2 million homes and reiterating the merged company’s commitment to provide low-cost 6-Megabits-per-second service.

 

AT&T also reassured the government that it has incentives to offer unfettered access to over-the-top video providers.

 

The deal is not expected to raise as many regulatory hackles as Comcast’s recently terminated merger with Time Warner Cable, mainly because it won’t give either party any additional dominance over the broadband market. Comcast-TWC would have created a behemoth with control of more than 50% of U.S. broadband customers. AT&T U-verse has about 12.6 million high-speed Internet customers — Comcast has about twice that much on its own.

 

AT&T has said that it plans to operate U-verse and DirecTV separately. The biggest synergies around the merger seem to be on the programming side — even run separately; being part of the largest MVPD in the country is likely to give AT&T some added leverage in future programming negotiations.

 

ACCESS TO BROADBAND

 

The AT&T pairing also will give Direc-TV the broadband product it has craved for years. In announcing the deal on May 18, 2014, AT&T pledged to use the merger synergies to expand its plan to build and enhance broadband service to 15 million moistly rural customers within four years through a combination of fiber to the premises and fixed wireless technology.

 

The company also said it would offer standalone broadband service — at speeds of at least 6 Mbps — to allow customers to access online video and over-the-top services such as Hulu and Netflix.

 

Back in May of this year, AT&T chairman and CEO Randall Stephenson reiterated his commitment to the TV product, and said that adding DirecTV could actually help grow broadband share.

 

“The area where we have struggled the most was our TV product,” Stephenson told CNBC. “And if you want to gain broadband share, you have to have a viable TV product. Our TV product today is subscale, it’s U-verse. It’s a great product, it sells terrific. But it is limited in terms of scope and where we have built.

 

“We do DirecTV, and we close that transaction, we go from a TV product that’s losing money to a TV product that’s profitable. I mean, day one, overnight that happens. And now you pair that with the broadband product and you have a much more robust product offering in the marketplace, and we think we’ll be very successful in competing against the cable guys and taking share from cable.”

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